Enservco Corporation

Good day, everyone, and welcome to the InserveCo 2023 first quarter earnings call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Jay Pfeiffer. Sir, the floor is yours.

Hello, and welcome to InserveCo's 2023 first quarter conference call. Presenting on behalf of the company today are Rich Murphy, Executive Chairman, and Mark Patterson, Chief Financial Officer. As a reminder, matters discussed during this call may include forward-looking statements that are based on management's estimates, projections, and assumptions as of today's date and are subject to risks and uncertainties disclosed in the company's most recent 10-K as well as other filings with the SEC. The company's business is subject to certain risks that could cause actual results to differ materially from those anticipated in its forward-looking statements. And Servco assumes no obligation to update forward-looking statements that become untrue because of subsequent events. I'll also point out that management's ability to respond to questions during this call is limited by SEC Reg FD, which prohibits selective disclosure of material non-public information. A webcast replay of today's call will be available at inserveco.com after the call. In addition, a telephone replay will be available beginning approximately two hours after the call. Instructions for accessing the webcast or replay are available in today's news release. With that, I'll turn the call over to Rich Murphy. Rich, please go ahead.

Good morning, and welcome to our first quarter earnings call. I'm pleased to report we are resuming regular earnings calls after taking several quarters off last year when we were focused on restating our financial statements. A lot has transpired in the meantime, and today, in addition to recapping a successful first quarter, we're going to review some of the other progress we've made over the past year and give you some insight into our plans for growing our business and building shareholder value. Today, I also have the pleasure of introducing to you Mark Patterson, our new chief financial officer who joined the company approximately one year ago with a mandate from the board to strengthen our finance and SEC reporting function and help further deleverage our balance sheet. In a moment, Mark will speak to these efforts and provide a recap of our Q1 results. The first quarter of 2023 marked and surfaced the eighth consecutive quarter of increased year-over-year revenue. This trend partially reflects a rebound following the prolonged industry downturn. that began in the mid-teens and extended to the COVID shutdowns when commodity prices bottomed out. It also reflects the resilience of our business, which is a product of our deep customer relationships and our dedicated field personnel who have been successful driving higher revenues in spite of sharp fluctuations in commodity prices over the past couple of years. Profit metrics in the first quarter also improved. Gross profit was up 56% and adjusted EBITDA more than tripled in the quarter. Our balance sheet, a major focus for us in recent years, and a key element of our plans to enhance shareholder value, was further strengthened in the first quarter with an equity capital infusion and an additional 15% reduction in long-term debt since year end. Before I hand the call over to Mark, I want to share with you a few of the reasons we're so excited about having him on board. Mark is a seasoned finance executive who has extensive experience in leadership roles with growth companies, both large and small. Among other assignments, he's a former CFO, director, and or financial officer of multiple publicly traded companies that have gone through periods of rapid growth and consolidation. Mark is also a rare CFO, in my experience, who has a strong entrepreneurial track record, as well as a deep and varied operations experience to augment his financial acumen. He's the founder and owner of Better Way Logistics, a fast-growing private freight brokerage. In short, he understands firsthand how to staff, manage, and grow profitable businesses. We're fortunate to have Mark on board and look forward to his ongoing contributions to our growth ambitions. So with that, I'll turn the call over to Mark. Mark?

Thanks, Rich. I do remain excited about joining the Inservco team. The company has a solid foundation of blue-chip customers. proven operations teams in the field, and a broad geographic footprint. Against the backdrop of our covering energy industry, we have tremendous opportunities to grow our revenue and improve our profits. Having worked our way through a lot of distractions over the past year, we're now turning our attention to doing just that. Before I comment on those topics, let me recap our first quarter results. Revenue increased 4% year-over-year to $8.9 million from $8.6 million. The increase was attributable primarily to continued growth in our customer demand, a solid performance from our fast-growing Southwest hot oil operation, and selective price increases in certain markets. The higher revenue in conjunction with ongoing cost reduction initiatives drove a 56% increase in gross profit for the quarter. coming in at 2 million up from 1.3 million in the same quarter of the prior year. Net loss in the quarter was 1 million or 7 cents per basic and diluted share versus net income of 3.1 million or 27 cents per basic and diluted share in the same quarter last year. The year-over-year comparison was skewed by some non-recurring events that need explanation. Specifically, the first quarter of 2023 Net loss included approximately $400,000 of expenses that we anticipate to be non-recurring, including $300,000 in legal costs and $100,000 for restricted stock issuance. Also note that net income in Q1 of 2023 included a $4.3 million gain on extinguishment of debt related to the company's first quarter debt refinancing. The point being, absent these two factors, our Q1 net loss this year would have been significantly lower or improved over the last years. Continuing adjusted EBITDA, which was also impacted by non-recurring expenses during Q1 of 2023, was up 255% to $0.7 million compared to adjusted EBITDA of $0.2 million in the same quarter last year. We believe adjusted EBITDA is a more accurate reflection of our profit picture, and we're happy that this important measurement has returned to a growth mode. Turning now to our cost-cutting efforts, which is a key area of focus for our team, we've been making a concerted effort to right-size our business to align with projected revenue growth rates. This involves reducing personnel costs through headcount reduction. and looking closely at field staffing levels across our operations footprint. We're also focused on lowering our public company costs, legal and accounting primarily, which have been sharply higher due in part to last year's restatements, the class action lawsuit, and our recent public offering and related activities. We're carefully examining every line item, including real estate, rents, utilities, equipment repairs, and insurance. We don't plan to overlook a single line item in our quest to create a leaner, more nimble, and productive organization from top to bottom. We're targeting significant improvements in gross margin levels at our SG&A run rate that will set us up to increase EBITDA margins in a meaningful way going forward. When you look at other publicly held businesses, not just in our space but across the spectrum, investors reward those companies that are driving costs down, even though they're not necessarily increasing revenues. In our case, we believe we can do both. We can drive our costs down and increase our revenue. A few words now on strengthening our balance sheet. As mentioned in our press release today, we continue to deliver our business in the first quarter. Our long-term debt declined to $7.2 million from $8.4 million a year in. The debt balance represents roughly an 80% reduction in long-term debt since reaching a peak in 2019. In other words, over the last few years, we've reduced our long-term debt from approximately $36 million to $7.2 million. That's an extremely important accomplishment for Insurfco that I'm not sure is fully appreciated by the investment community. We're not done. There are several additional debt reduction initiatives in the works, and if those are completed, we'll further reduce our debt and convert the dollars we spend on debt service into positive cash flows. With that, I'll hand it back over to Rich for some closing remarks.

Hey, thanks, Mark. Building on the subject of debt reduction, a strong, delevered balance sheet is a key building block for Shareholder Valley because every dollar we take out of debt service directly enhances our cash flow. Consequently, we are focusing a lot of attention here and, as Mark mentioned, hope to have more positive news to report in coming quarters. As you may know, our proxy statement contains an important proposal we are asking shareholders to approve at the upcoming June 13th annual meeting. Specifically, proposal number two would enable crossover partners to convert up to two and a half million in promissory notes to equity. This would reduce our 7.8 million debt balance to under 5.5 million. It would also translate into an additional 250,000 in annual cash savings on debt service. And as a bonus, it would bring Insurfco back into compliance with the NYSE American stockholders' equity requirement of $6 million. So if you received your proxy statement and not yet mailed in your proxy card, please consider this proposal carefully and vote in favor of the measure as recommended by your management team and board of directors. We believe that debt conversion and improved financial condition will enable us to refinance our $5.6 million equipment financing loan at a more favorable rate. Our current facility carries an interest rate in the mid-high teens that we hope to reduce into the 12% range. If we are successful, this would result in a decrease in the monthly cash outlay required to service this debt by approximately $80,000 to $90,000 per month. In summary, assuming a positive shareholder vote on proposal 2's debt conversion and a successful debt refinancing, we have the potential to dramatically reshape our balance sheet, improve cash flow, and give us critical financial flexibility to continue executing our business plan. Further to the subject of our business plan, we are focused on driving additional organic revenue growth by adding new customers, expanding wallet share with existing customers, and potentially adding new service lines that would either be developed internally or acquired through an M&A transaction. We are also focusing more heavily on our how to earn business, where we have made inroads with both new and existing customers, particularly in southwest Texas, where we have steadily added teams and equipment to service the growing demand there. As those of you who have followed us for a while know, our business has traditionally been highly seasonal, with second and third quarters less active than cooler first and fourth quarters when crack water heating activity increases. We are committed to reducing the seasonality by adding more year-round services, which again can potentially be done either internally or through M&A. With this growth and expansion in mind, in April we strengthened our board of directors with the addition of Kevin Chesser, who has also joined as chairman of our audit committee. Kevin is a CPA and highly accomplished and respected finance executive who brings to the board a wealth of relevant experience in all major aspects of public company finance and SEC reporting. Before I open the call to questions, I want to thank our shareholders for their confidence and support. And in particular, our longtime shareholders for hanging in there with us during a difficult couple of years of dealing with distractions that had nothing to do with building our business. Moving ahead, we're looking forward to seeing what we can accomplish with a lot of these distractions now behind us. With that, operator, you may now open the call to questions.

Certainly. At this time, we'll be conducting a question and answer session. If you have any questions or comments, please press star 1 on your phone at this time. We do ask that while posing your question, please pick up your handset, if you're listening on speakerphone, to provide optimum sound quality. Once again, if you have any questions or comments, please press star 1 on your phone. Your first question is coming from Jeff Gramp from Alliance Global Partners. Your line is live. Morning, guys. Thanks for the time.

Hey, Jeff. Good morning.

Morning. In your prepared remarks, Rich, you mentioned a refinance on the debt side of things. I was curious to dig into that a little bit more, given some of the uncertainty with some of the regional banks that's getting a lot of headlines. It sounds like it's fair to assume that given the dramatic improvement in your balance sheet, that you don't expect that to be a meaningful impediment to a potential refinance. I guess first, can you just confirm that that's a fair read? And if you guys have any sense of kind of the timeline. Is that a calendar 23 event or, or how do you see that playing out?

Let me, let me talk first and then Mark, can you jump on follow up? But the, the, I mean, the reality is our debt's getting so low that compared to the value of our equipment, it's becoming much easier. So when I talk about under five and a half million in debt, that's coming from 36 million a couple of years back. And that was a real tough haul to try to get that refinance. Now it's, From a regional bank standpoint, we're looking at a variety of different lenders, both regional bank and non-traditional. As you can imagine, oilfield services and E&P, small E&P, have had a tough time, you know, getting lenders to come to the table. That's actually changed over the last year or so, I would say, at least from our vantage point. So I think it's going to be a mix of term sheets from a variety of lenders, and we'll just, you know, have a beauty contest and see what the best one is, best terms are. And the reality also is we can stick with our current lender and use that to, you know, see if we can refinance that debt at some level. Mark?

Yeah, I think Rich touched on the fact that, you know, most of the regional banks we're kind of isolated from simply because they're so focused in cash flow lenders and being in lending industries that are favorable and popular that they're not really looking too heavily at the energy services sector right now. As Rich pointed out, I think there are a lot of equipment lenders that are more asset driven than cash flow driven and that will probably be the likely landing spot. It will be an improvement from where we are but probably not as favorable as if we could just walk into our local regional bank and get a borrowing that was close to the prime lending rate.

Got it. Understood. That's helpful. I appreciate that. And can you guys give us a sense, kind of leading-edge pricing, and I know maybe it's hard to bifurcate by service line, but maybe on a you know, sequential basis or on a year-over-year basis, whatever's easier for you guys to kind of parse out. Just curious the direction of what you guys are seeing and your ability to take on price.

So there's basically two different service lines, right? There's the hotline, which is primarily our Texas, Southwest Texas world. We're seeing real strong price. I mean, I think I had a lot of time at a conference call. It was, you know, well over a year, but our pricing was in, you know, in 125 to 115 an hour range. On some of our hot oil, that's significantly higher, and it's more edging closer to the 180 to 185 an hour. So that market has seen significant pricing and very stretched thin as far as equipment availability, which usually precedes price increases. And so it continues strong. The heating is seasonal. We had a very, you know, we saw the first quarter strong heating environment. It's fairly competitive in Colorado. We feel like that's going to rationalize itself over time. Again, not much new equipment's coming into that market. And we've got a very consolidated operator market in, you know, essentially four and a half big operators in the DJ basin. So I don't see any real capital coming to this market. And I don't, you know, which to me, even with a $70 to $80 oil, there's no capital coming into what we do. So I think there's an opportunity for continued price increases over time. That being said, where the prices are now are very good margins for us.

Great. Okay, understood. And maybe tying into that last one on lack of capital coming into the industry, tying that in with the balance sheet improvements that you guys have had, do you guys get the sense that you're kind of sufficiently cleaned up from a leverage balance sheet perspective to the point where you can more seriously entertain M&A opportunities? Are there a couple more steps that need to take place? Just kind of curious, you know, what you guys kind of see as kind of maybe the near or medium term outlook as it relates to M&A opportunities.

Yeah, as I remarked, I said twice we're looking at M&A as a potential opportunity. growth vehicle, we couldn't have said that two and a half years ago or two years ago even because our balance sheet was so leveraged. Now it's not an issue whatsoever. So I think there's going to be a lot of opportunities in the M&A space, and there's not a lot of publicly held oilfield services companies anymore. There's the big four or big three, if you will, and then a few little guys. Everyone else is private. And as I said about access to capital, The banks aren't loving oil sales services even at $78 oil. Capital is king right now. We do have a public currency and that's something that gives us a clear advantage over some of our other peers. We intend to use it now. We couldn't use it two years ago. That being said, I'm a value guy. I'm a cash flow guy. That's my background. This has been a real hard hill to climb. Not seeing all the trying to deal with this balance sheet, but since we've gotten to the top of the hill, basically, anything we do will be cash flow focused. Great.

Look forward to it. Thanks, Rich. Thanks, Mark.

No problem, Jeff. Thank you. Once again, everyone, if you have any questions or comments, please press star, then one on your phone. Please hold while I poll for questions.

Thank you.

That concludes our Q&A session. I will now hand the conference back to our host for closing remarks. Please go ahead.

Yeah, I just want to say thank you to everybody. It has been a long road. I think we're getting near the point now where it gets fun again, where we can grow the business. So stay tuned, and we look forward to talking to you all in August with our second quarter results. Take care. Thanks.

Thank you, everyone. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.